All 10 major Asian currencies are forecast by strategists to fall against the dollar for a third year. They blame China.

Indonesia’s rupiah, South Korea’s won and the Singapore dollar are projected to decline the most in 2016, with India’s rupee seen depreciating the least. While the U.S. Federal Reserve on Wednesday indicated four interest-rate increases next year, Taiwan cut on Thursday and economists are forecasting reductions in China, South Korea, Thailand, India and Indonesia to spur growth.

Asian Currencies Face Third Year of Pain in 2016

Source: Bloomberg

China’s slowdown is hurting Asian nations with strong trade linkages to the world’s second-biggest economy, and the Aug. 11 devaluation of the yuan clouded the outlook for a currency that had been source of stability in Asia during past crises. Goldman Sachs Group Inc. and JPMorgan Chase & Co. say Chinese renminbi weakness will infect exchange rates in the region and across emerging markets.

“The Chinese yuan trumps the U.S. dollar so far in terms of its impact on Asian currencies," said Claudio Piron, co-head of Asian currency and rates strategy at Bank of America Merrill Lynch in Singapore. “Asia has a heightened sensitivity to the yuan, which represents the hub of the region’s supply chain to the rest of the world."

The yuan weakened 2 percent this month in Hong Kong’s offshore market, the most in Asia after the won, and 1.3 percent in Shanghai after the People’s Bank of China allowed its decline versus the dollar to accelerate. Restrictions on trading are being lifted as the International Monetary Fund adds the currency to its reserve basket.

The PBOC has cut the yuan’s reference rate by 1.3 percent in December. That’s the most since August, when policy makers lowered the fixing by 4.4 percent in three days. Friday’s level of 6.4814 versus the dollar was the weakest since June 2011. A measure of swings in the currency reached the highest since August on Dec. 14, after an arm of the central bank unveiled a new yuan index comprising 13 currencies, a development seen as setting the stage for a further depreciation.

Indexes compiled by the Bank for International Settlements show the yuan is still the strongest among 24 emerging-market currencies in trade-weighted terms after adjusting for inflation, hurting China’s export competitiveness.

“China is actually gaining some competitiveness on a trade-weighted basis" with the help from the weaker fixing, said Craig Chan, the Singapore-based head of foreign-exchange strategy for Asia ex-Japan at Nomura Holdings Inc. With this week’s policy tightening by the Fed already priced in, going forward Asian currencies will be more sensitive to moves in the yuan, he said.

Citigroup, Nomura

Citigroup Inc., the world’s biggest foreign-exchange trader, Bank of America and Nomura recommend selling the won and Taiwan dollar against the greenback given their close economic ties with China. Bank of America and Nomura also advise selling the offshore yuan, which trades freely unlike the onshore currency.

Asia’s largest economy accounts for 34.3 percent of South Korea’s total trade, according to the Japanese brokerage, followed by the Philippines at 25 percent and Thailand, Malaysia and Taiwan at about 22 percent each. Some 19 percent of Indonesia’s trade is with China, and a slump in global commodity prices also weighs on the Southeast Asian nation’s currency. Exports contracted for nine months this year in China, 11 months in South Korea and 10 months in Taiwan.

Though the yuan will weaken next year, a sharp depreciation by Chinese authorities is unlikely, according to the world’s largest money manager.

BlackRock Sees Caution

“They’ve already learned that it will trigger devaluations elsewhere," said Joel Kim, the Singapore-based head of Asia-Pacific fixed income at BlackRock Inc., which oversees $4.5 trillion. “The fact that exports have come down is a global demand problem rather than a competitiveness issue in China itself. China is likely going to favor macro-stability and the currency is part of it."

The IMF predicts growth in Asia’s developing economies will slow to 6.4 percent next year from 6.5 percent in 2015, with China’s expansion decelerating to 6.3 percent from 6.8 percent. That means Asian central banks will need to further cut interest rates while the Fed gradually tightens, resulting in outflows and weaker currencies.

Seven of 23 economists in a Bloomberg survey expect the Bank of Korea to lower its main rate by at least 25 basis points next year from a record low of 1.5 percent. Further easing is also forecast in Indonesia, Thailand and India.

“This impending Fed tightening cycle is without a strong synchronized global recovery and export rebound," said Bank of America’s Piron. “Typically this would be bullish for Asian currencies as they would appreciate as their current-account surpluses expand on improving exports. This time we have the reverse."

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